Top Energy And Telecom Buys For Record Q1 Estimate Increases

LOS ANGELES, CA - FEBRUARY 17: A general view of atmosphere at the Verizon Up Members Lounge during the 2018 NBA All-Star Weekend on February 17, 2018 in Los Angeles, California. (Photo by Christopher Polk/Getty Images for Verizon)

The first quarter of 2018 marked a record increase in earnings estimates by Wall Street analysts. In fact, according to Factset, it was the largest increase in the bottom-up EPS estimate during a quarter since they began tracking the quarterly bottom-up EPS estimate in Q2 2002. Factset data over the past 60 quarters exhibits EPS estimates for Q1 are usually in the negative domain, with an average decline of 4.1%. The first quarter of 2018 was a serious break from this trend, largely due to the tax law changes that brought billions back into the U.S. The overall Q1 bottom-up EPS estimate increased by 5.4% and the two sectors with the strongest analysts increases were energy (14.6%) and telecom (14.1%).

The turbulence and market correction in Q1 and beyond has everyone looking outside the box for some alpha. Our strategy for capitalizing on abnormal EPS estimate trends leads us to the sectors with the largest upward revisions. Factset recently highlighted that EPS revisions for the S&P 500 saw a record increase for Q1. Telecom and energy led the market in Q1 bottom-up EPS estimates. There have been a number of factors driving earnings for the telecom sector such as increased demand for wireless, demand for fiber optic connectivity, and overall economic growth. The energy sector is benefiting from stronger economic growth, but it is worth mentioning that earnings estimates were unusually low a year ago and analysts are revising up this year. We took the top CressCap buy recommendations for the strong-performing energy and telecom sectors and refined them based on strong EPS revision grades.

Expand to see how our directional recommendations are computed: CressCap uses a multi-factor model to select the best-performing stocks. Our data is updated daily and the academic grades (A - F) for each financial metric are scored and ranked on a regional/sector relative basis. The foundation of our recommendations is to identify companies that possess the collective investment style of Value, Growth, EPS Revisions, Profitability and LT Momentum. Academic grades of C or better indicate that each metric scores well compared to the peer sector.CressCap Investment Research

Energen Corporation - Energy

Our first pick for EPS estimate beneficiaries is the Energen Corporation. Energen focuses on oil exploration and production in the Permian Basin and other reserves throughout the U.S.. CressCap’s computer driven analysis grades Energen’s EPS revisions an A, on a sector relative basis. Market turbulence caused the stock price to decline, but it is trending back up now. The company has all A+ grades for momentum in the short, medium and long-term, with long-term price increasing 66.39% while the sector had an average price decrease of 3.05%. The recent acquisition of RSP Permian by Concho Resources began a M&A race in the Permian Basin. Energen is performing among the best in the sector, and the stock has solid fundamentals. While past performance does not always mean future performance, we anticipate this will favor the company in the medium to long term.

Verizon Communications Inc. - Communications

There's no harm in picking well known stocks like Verizon. In the case of VZ, its position in the public consciousness is well deserved. Verizon is ranked number 2 in the telecom sector and its EPS revisions reflect the Q1 trend. The telecom giant owns brands including Yahoo! and Tumblr, and has a total reach of over a billion people. Verizon’s EPS revisions are strong and are accompanied by the company’s impressive profitability. According to the most recent earnings report, Q4 2017 exhibited a huge jump year over year. Earnings of $4.57 were up from just $1.10 in Q4 of 2016. Verizon’s 2yr historic EPS growth was graded B, a 68.42% growth relative to a sector change of -47.76. ROE and ROI are both A+ grades by CressCap, and the former is a staggering 91.74% in a sector with an average of 4.61%.

GeoPark Ltd. - Energy

GeoPark’s share price movement also stagnated in the first quarter of the year and recently started moving up again. The company reported adjusted EBITDA for Q4 2017 of $175.8 million, a huge jump from Q4 2016 adjusted EBITDA of $78.3 million. The 2 Yr. forward sales growth rate (%) scores a B+ grade relative to the sector, as the growth rate is 61% vs. 35%. The oil and natural gas producer has assets throughout Latin America and is a top producer in Chile and Brazil. GPRK has appreciated 74% over the past year, a year in which the energy sector saw a depreciation of .06%. EPS revisions are A grades for FY1 and FY2, with FY2 projections staying strong while sector estimates are revised down. The stock’s profitability is also very solid, with a B grade for operating margin and an A- for its gross profit margin, grades derived from metrics od 44% against a sector average of 24%. The company recently announced a long-term strategic partnership with ONGC Videsh to expand their assets and portfolio across Latin America.

Telephone and Data Systems, Inc. - Telecom

TDS is a provider of phone and internet services aimed at helping companies raise their bottom line. Based in Milwaukee, Wisconsin, the company has a global reach and an unwavering commitment to satisfactory customer service. CressCap Grades the stock as a B overall, and recommends it as a buy based on our criteria. While the stock price has been staying relatively flat recently, EPS estimates have been being revised up. The company represents a great value, with a price/book ratio of .65, earning a grade of A, relative to a sector average of 1.21. TDS is also exhibiting promising growth metrics, with EPS mark revisions for FY2 earning an A grade according to CressCap. Finally, the company does have some reassuring grade for profitability, with B- grades in ROC and net income margins.

Delek US Holdings Inc. - Energy

Delek is a downstream petroleum distribution and logistics company with its main operations based in the southern and south western United States. Delek has seen price increases in the last few days, following the announcement of the acquisition of Andeavor by Marathon, which caused Delek’s stock to trade up 1.9% on the day. The stock is recommended as a buy in CressCap’s system and touts an impressive overall A grade. Although the stock has soared recently, the company has outstanding mid and long term trends, both graded A+, and dwarfing the sector averages for momentum metrics. Overall, the increase in price has not significantly affected the stock’s value grade, still a B+ according to CressCap’s computer intelligence. Price/salesFY1 ratio is an A+ relative to the sector as the multiple is only 0.40 vs. 2.18 for the sector. Additionally, the 2 Yr. forward sales growth rate (%) scores a B- grade relative to the sector as the growth rate is 45% vs. 35%. Delek is still listed as buy recommendation on our platform.

I founded CressCap Investment Research in 2016. At CressCap, we provide research across multiple asset classes and are viewed as a pioneer in the fusion of statistical computing systems, systematic trading models and autonomous research analytics. The genesis of CressCap wa...